Part 4 of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”) sets forth the rules that apply to fiduciaries of ERISA-covered employee benefit plans. These “fiduciary responsibility” rules include the requirement to hold plan assets in trust, a fiduciary’s duties of loyalty, prudence, diligence and diversification, and the prohibition on certain transactions between the plan and parties-in-interest. One of the lesser-known (but still important) rules is the requirement (under Section 412 of ERISA) that every person who “handles” funds or other property of the plan be bonded.
Although the Department of Labor (“DOL”) published extensive temporary regulations regarding the ERISA bonding requirement in 1985, those regulations have never been formally finalized. And until recently, the DOL had not issued any significant guidance regarding the bonding requirement for over 20 years. In 2006, the Pension Protection Act (“PPA”) amended Section 412 of ERISA to increase the amount of the bond required for plans that hold employer securities. The PPA also created a new exemption from the bonding requirement for entities that are both (i) registered as brokers or dealers under the Securities Exchange Act of 1934, and (ii) subject to the fidelity bond requirements of a “self-regulatory organization” (as that term is defined in the Securities Exchange Act).
In November of last year, the DOL issued Field Assistance Bulletin No. 2008-04, which consists of 44 “frequently asked questions” (and answers) about the ERISA bonding requirement. Although the Bulletin was designed to provide guidance to the regional offices of the DOL (as they review Form 5500 annual reports and perform audits of ERISA-covered employee benefit plans), the guidance is also helpful to plan sponsors, fiduciaries, and service providers. The Bulletin is intended to clarify the existing regulations, to answer questions not addressed in the regulations, and to address the PPA changes to the bonding requirements.
OVERVIEW OF FIELD ASSISTANCE BULLETIN
The following are some of the key points made by the DOL in the Field Assistance Bulletin:
1. Bond Basics — An ERISA fidelity bond protects a funded pension or welfare plan from losses due to fraud or dishonesty, regardless of whether the person causing the loss engaged in criminal conduct or gained financially. The plan must be the named insured on the bond, and fiduciaries and others who handle plan assets must be covered by the bond.
A fidelity bond is not the same as fiduciary liability insurance. A bond protects the plan from losses attributable to the actions of those with access to the plan’s assets. By contrast, fiduciary liability insurance generally protects the fiduciary from losses due to a breach of fiduciary duty. An ERISA bond protects only against losses due to fraud or dishonesty – it does not protect the plan from all losses that may be caused by a fiduciary’s breach of duty. However, an ERISA bond is not limited to the actions of fiduciaries – it protects the plan from losses attributable to the dishonest or fraudulent act of any person who “handles” plan assets.
2. Who Must be Bonded — Every person who “handles funds or other property” of the plan (referred to as “plan officials”) must be bonded, unless they are covered by an exemption. Plan officials are not limited to fiduciaries. (In fact, fiduciaries must be bonded only if they “handle” funds or property of the plan and are not covered by an exemption.) Plan officials could include plan administrators, claims processors, service providers, and any other individuals who could cause a loss of plan assets by virtue of their access, responsibilities, or authority.
An individual “handles” plan funds or property if he or she has the power to transfer funds, negotiate property for value, or disburse or direct disbursement of cash or property. This includes supervisory or decision-making responsibility over such activities.
3. Responsibility for Satisfying the Bonding Requirement – The Bulletin clarifies that the responsibility for ensuring that plan officials are bonded may fall on more than one person simultaneously. Each plan official who handles plan funds or property is directly subject to the bonding requirement. However, a plan fiduciary who permits another person to handle plan funds or property must also ensure that the person handling the funds is properly bonded. Thus, if a named fiduciary hires or appoints a trustee for the plan, the named fiduciary must ensure that the trustee either is subject to an exemption from the bonding requirement or is properly bonded. The bond may be purchased by the covered plan official, by the plan sponsor, or by a plan fiduciary, and the cost of the bond may be paid out of plan assets.
4. Exemptions – Section 412 specifically excludes from the bonding requirement any fiduciary that is a bank or insurance company subject to state or federal supervision or examination and that meets certain capitalization requirements. As noted above, the PPA also added a statutory exemption for certain entities registered as brokers or dealers under the Securities Exchange Act if certain requirements are satisfied.
The DOL has also issued regulatory exemptions for banking institutions and trust companies that are subject to regulation and examination by certain federal agencies (such as the Federal Reserve), and for insurance companies that provide or underwrite welfare or pension benefits in accordance with state law. Unlike the statutory exemption described above, these exemptions apply even if the bank or insurance company is not a fiduciary of the plan.
5. Amount of Bond – Generally, each official must be bonded in an amount equal to at least 10% of the amount of funds he or she “handled” in the previous year. However, the bond amount cannot be less than $1,000, and the DOL generally cannot require an official to be bonded for more than $500,000. Beginning in 2008, the PPA increased the maximum bond limit for plans holding employer securities to $1 million. The DOL may, following notice and a hearing, require a bond greater than the $500,000/$1 million limits described above.
CONCLUSION AND RECOMMENDATIONS
There are many reasons why plan sponsors and fiduciaries should understand (and make sure that they are in compliance with) the ERISA bonding requirement. A plan is required to report, on Schedule H or I of Form 5500, whether the plan is covered by a fidelity bond, as well as the amount of the bond. This makes it very easy for the DOL to monitor compliance with the bonding requirement, and the existence and adequacy of a fidelity bond is one of the routine aspects of any DOL audit of an ERISA-covered plan.
More importantly, a plan fiduciary who fails to ensure that plan officials are properly bonded may be personally liable for any losses to the plan caused by a dishonest plan official. Thus, plan sponsors and fiduciaries are urged to review this recent guidance to make sure that all individuals who “handle” assets of plans subject to ERISA are properly bonded.